A trader needs to have an edge over the rest of the market. Day traders use any of a number of strategies, including swing trading, arbitrage, and trading news. They refine these strategies until they produce consistent profits and limit their losses.
There also are some basic rules of day trading that are wise to follow: Pick your trading choices wisely. Plan your entry and exit points in advance and stick to the plan. Identify patterns in the trading activities of your choices in advance.
Day traders use numerous intraday strategies. These strategies include:
- Scalping: This strategy focuses on making numerous small profits on ephemeral price changes that occur throughout the day. Arbitrage is a type of scalping that seeks to profit from correcting perceived mispricings in the market.
- Range/Swing trading: This strategy uses pre-determined support and resistance levels in prices to determine the trader’s buy and sell decisions.
- News-based trading: This strategy seizes trading opportunities from the heightened volatility that occurs around news events or headlines as they come out. One type of news-based trading involves whether a merger or acquisition that has been announced will go through or not.
- High-frequency trading (HTF): These strategies use sophisticated algorithms to exploit small or short-term market inefficiencies.2
| Day Trading Strategy Breakdown | ||
|---|---|---|
| Type | Risk | Reward |
| Swing Trading | High | High |
| Arbitrage | Low | Medium |
| Trading News | Medium | Medium |
| Mergers/Acquisitions | Medium | High |
| HFT | Medium | High |